Key person insurance

Cover for the financial effect of losing somebody the business depends on.

What it means

Key person insurance pays the business a sum on the death or critical illness of a named individual whose loss would materially damage it.

Why it matters

In an owner-managed business the key person risk is usually the largest uninsured exposure there is, and it is the one lenders and buyers ask about.

What it looks like in practice

Shareholder protection is the related product: it funds surviving shareholders to buy the deceased's shares, usually alongside a cross-option agreement, so the family gets money and the business keeps control.

What to watch out for

Having the policy and no agreement. Without a cross-option agreement, the shares pass to the estate and the surviving shareholders may find themselves in business with somebody who does not want to be there.

Where to get proper advice

An insurance broker who understands your sector. Read the policy wording, not the summary. And a solicitor for the cross-option agreement.